Money Mondays: Rewards Programs: Buyer Beware

You’re not a big fan of rewards programs, but what’s wrong with free goods and services?
Hey, I’m like everyone else—I like free, which is why rewards programs are everywhere now. You get rewards for buying coffee and clothing and credit card use…Why does every company have a rewards program? It’s not because they’re being nice and rewarding loyal customers; it’s because companies know that consumers love the idea of getting free stuff, and the rewards programs keep you coming back and entice you to spend more.

The value of the frequent-flier miles, hotel rewards, credit card points and other loyalty program currency that Americans earned in 2010 was about $48 billion. And that doesn’t include cash discounts that grocers and other retailers often offer.

The average household has 18 loyalty program memberships. How can we keep them straight?
The answer is that we don’t, Nearly one-third of loyalty program points go unredeemed. The average household earns $622 a year in miles and points and such, so missing out on a third of that means that over $200 has gone to waste.

Any tips you can give about making the most of rewards?
First, leave the diversification to your stock portfolio. Consolidate your spending in one or two programs that deliver the biggest return. Look at your spending habits to figure out where you’re spending the most money to help you get the most bang for your buck.

When it comes to airline rewards, the actual average monetary value placed on a mile is roughly 1.5 to 2 cents each. When redeeming them, be sure the price of the trip would generally cost more than the amount of miles you’re cashing in.

As for other cards, be sure you’re going to actually use those rewards, because you frequently pay a fee to get the card or with the case of credit, a higher rate. At the end of January 2012, the average credit card without a rewards program had an interest rate of 14.72 percent. The average interest rate for cards with rewards, however, was 17.63 percent. That’s a spread of 2.91%–nearly 3%.

Now that might not seem like a lot, but it can be depending on how much money you let carry over from one month to the next. If you pay off your balance each month or use your rewards to your full advantage, you might save more than you’re charged in extra interest, but be sure to do the math.

Finally, use ‘em or lose ‘em. Many points expire after a certain period of time. Credit card points can be held hostage due to a late payment, barring you from earning points or spending them until you’re paid up. If you're sitting on a cache of miles or points that are about to expire, check if you can transfer them to friends or family. You can also frequently donate reward points or miles to charity. The options vary: American Express lets cardholders pick from a database of 1 million non-profit groups, while Bank of America cardholders can pick from about a dozen charities, such as the Humane Society and the Make-A-Wish Foundation.

Keep in mind that donated credit-card points and miles generally aren't tax deductible because they're considered rebates on previously purchased goods, according to the Tax Institute at H&R Block.